Short sellers target Apple supplier IQE

LONDON, Jan 30 (Reuters) - Some of the world’s largest hedge funds have set their sights on Welsh technology company IQE , making a $150 million bet against its shares on speculation rivals could disrupt its market.

Cardiff-based IQE produces around 80 percent of the global supply of outsourced “epi-wafers”, a type of advanced material used in products from laser hair removal to the 3D-sensing camera in the latest iPhone X.

Its share price has risen more than six-fold since mid-2016 as investors bet the company could benefit from a huge contract with Apple.

But over the last few months, some short sellers - who position themselves to profit when a share price falls - have grown convinced that IQE will lose its dominant position in the technology, according to sources familiar with two of the seven hedge funds that have disclosed short positions in IQE’s stock.

They declined to be named as they are not authorized to speak publicly.

Short interest has risen more than tenfold from July to a high last week of 12.4 percent of the company’s shares, according to filings disclosed with UK regulator the Financial Conduct Authority.

IQE is now the third most-shorted stock in Britain, behind department store Debenhams and sub-prime lender Provident Financial, both of which have recently suffered a series of profit warnings.

IQE, which reports full-year results on March 20, said it knew of no reason for the sudden spike in short interest other than its positive share price performance, which might lead to some profit taking.

“It is quite common. When you see that (a share price rise) it does increase the short position, but there is no known reason that we are aware of and it’s business as usual from our point of view,” the firm’s head of investor relations Chris Meadows told Reuters.

APPLE ORDERS

Apple uses epi-wafers to power iPhone X features like Face ID and Animoji, and in its AirPod headphones.

In December, it made a $390 million investment in Texas-based Finisar, which plans to supply the company with similar materials to IQE.

A number of Taiwanese companies are also manufacturing epi-wafers, with HLJ Technology’s shares doubling since December, when it was reported by industry publication Digitimes that the company would supply Apple.

“Seeing more competitors shows it is a market that is expected to grow quite significantly,” Meadows said. “We are pretty confident we have a significant lead technology-wise.”

Hedge funds also point to two joint ventures that IQE runs with universities in Wales and Singapore that make losses but are not recognised on IQE’s own income statement.

IQE said it expected these ventures to eventually be profitable, and that they formed part of a long-term plan of developing new technologies in partnership with universities.

The fund with the largest disclosed short position in IQE is Marshall Wace, which was among those that made hundreds of millions of pounds betting against British construction and outsourcing company Carillion before its collapse.

It was also short Imagination Technologies, an Apple supplier whose share price plunged in April after Apple announced it was cutting the company out of its supply chain.

The other six funds with disclosed short positions are Coltrane Asset Management, Ennismore Fund Management, Millennium International Management, Quentec Asset Management, Valiant Capital Management and WorldQuant.